Ita/132/2001 Of P.g. Bhanumathy v. The Commissioner Of Incometax, Kochi

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.M.JOSEPH TUESDAY, THE 18TH JULY 2006 / 27TH ASHADHA,1928 ITA.No. 132 of 2001 --------------------- AGAINST THE ORDER DATED 15.6.2001 IN ITA.528 (Coch)/1996 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT: ------------------------------------- SMT. P.G. BHANUMATHY, M/S. BHAVI BOOKS, COCHIN BY ADV. SRI.P.BALAKRISHNAN (E) SRI.R.AMRITHARAJ RESPONDENT/RESPONDENT: ---------------------------------------- THE COMMISSIONER OF INCOMETAX, COCHIN. BY ADV. SRI.P.K.R.MENON(SR.),SC FOR IT SRI.GEORGE K. GEORGE, SC FOR IT THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 18/07/2006, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N. RAMACHANDRAN NAIR & K. M. JOSEPH, JJ. ----------------------------------------------- I.T.APPEAL NO.132 OF 2001 ----------------------------------------------- Dated this the 18[th] day of July, 2006 JUDGMENT C. N. Ramachandran Nair, J. The appellant/assessee is challenging the order of theIncome Tax Appellate Tribunal confirming disallowance ofRs.10 Lakhs in the computation of capital gain for theassessment year 1992 - 93. During the accounting year relevantfor the assessment year 1992-93, the assessee sold a flat andreceived a net consideration of Rs.52 Lakhs. The facts onrecord disclosed that out of Rs.52 Lakhs, appellant investedRs.44 Lakhs in the Syndicate Bank as Fixed Deposit and availeda loan of Rs.4 Lakhs on the security of the Fixed Deposit. Afteradjusting the loan amount, the balance amount of Rs.40 Lakhsreceived by the appellant was deposited in capital bonds issuedby the IDBI on 26.5.1992 as investment in specified asset interms of Section 54E of the Income Tax Act. The deposit inIDBI Bonds yielded an advance interest of Rs.9.4 Lakhs which along with another amount of Rs.60,000/= taken by theappellant from the Bank was also deposited in IDBI Bonds on28.5.1992. Since both the amounts were deposited within sixmonths in terms of Section 54E, the appellant/assessee claimedexemption from capital gains on the entire deposit of Rs.50Lakhs. Even though assessing officer allowed exemptionattributable to Rs.40 Lakhs deposited by the appellant inspecified asset under Section 54E of the Act, exemption wasdeclined for the investment of Rs.10 Lakhs under the specifiedasset on the ground that the same does not form part of the netconsideration. In the first appeal, disallowance was confirmed.Second appeal also met with the same fate and hence theassessee has filed this appeal before us under Section 260A ofthe Income Tax Act. 2. We have heard Shri P. Balakrishnan, learned counselappearing for the appellant/assessee and also the learnedstanding counsel appearing for the Income Tax Department.Learned counsel for the appellant referred to the relevant 2. We have heard Shri P. Balakrishnan, learned counselappearing for the appellant/assessee and also the learnedstanding counsel appearing for the Income Tax Department.Learned counsel for the appellant referred to the relevant Sections, namely transfer as defined under Section 2 (47) of theAct. He also referred to Section 45(1A) which provides forassessment of notional capital gains on accrual basis and itseligibility for exemption Section 54E, to contend that actual netconsideration received need not be invested in specified assetsfor claiming and granting exemption under Section 54E of theAct. In other words, the appellant's contention is that the netconsideration as such need not be invested and investment of itsequivalent in specified asset is sufficient to grant exemptionunder Section 54E of the Act. The question, therefore, to beconsidered is whether in order to qualify for exemption underSection 54E of the Act, the net consideration as such should beinvested in specified assets provided under Section 54E of theAct or whether it is enough that the assessee raises funds fromany source and deposits the equivalent sum of net considerationwithin six months from the date of transfer in specified assets.Even though learned counsel for the appellant/assessee hasexplained various situations whereunder the assessee may be entitled to exemption from capital gains by investment inspecified assets from sources which are not received on sale orexchange or transfer of the capital asset, we do not think anysuch hypothetical issue need be considered for deciding thiscase, the facts of which are stated above. There may besituations where assessee has not in fact received considerationon transactions amounting to transfer for the purpose of capitalgains which do not yield any cash to the assessee or cases whereassessee may be receiving payment beyond six months from thedate of transfer disabling him from depositing from out ofconsideration for the purpose of claiming exemption underSection 54E of the Act, but still entitled to benefit by raisingfunds and depositing the equivalent net consideration or partthereof within the time stipulated under Section 54E of the Act.However, in this case, it is admitted that out of Rs.10 Lakhsdisallowed under Section 54E of the Act, the source of Rs.9.4Lakhs raised by the appellant is not part of the net considerationon sale of the flat by the appellant, but is the advance interest yielded for the specified assets purchased by the appellant withthe net consideration of Rs.40 Lakhs. The balance Rs.60,000/=is found to be deposited by the appellant by withdrawing fromher S.B. Account, which is also not part of the net consideration.Even though we are in agreement with the appellant's counselthat there is no means provided under the Act to relate theidentity of the net consideration with the investment in specifiedassets, what is contemplated under Section 54E is that the netconsideration should be invested within the time stipulatedtherein. “Net Consideration” as defined in Explanation 5 toSection 54E(1) of the Act is as follows: “Explanation 5.- “Net consideration”, inrelation to the transfer of a capital asset, means the fullvalue of the consideration received or accruing as aresult of the transfer of the capital asset as reduced byany expenditure incurred wholly and exclusively inconnection with such transfer.” 3. It is obvious from the above that net consideration does not include any accruals on the investment from out of the netconsideration of the asset transferred. “Net consideration” is “Explanation 5.- “Net consideration”, inrelation to the transfer of a capital asset, means the fullvalue of the consideration received or accruing as aresult of the transfer of the capital asset as reduced byany expenditure incurred wholly and exclusively inconnection with such transfer.” 3. It is obvious from the above that net consideration does not include any accruals on the investment from out of the netconsideration of the asset transferred. “Net consideration” is only net sale value obtained on transfer of capital asset, whichis a full value received as reduced by expenditure incurred forand in connection with the transfer. The assessee's counselsubmitted that the time-frame for investment under Section 54Eis sufficient opportunity to the assessee to use the netconsideration, generate income therefrom and invest from out ofthe same any amount in full or part of the net consideration interms of Section 54E to get the benefit of exemption. Learnedstanding counsel for the respondent, on the other hand,contended that the purpose of granting six months' time is togrant reasonable time to the assessee to get the fullconsideration and to enable to make the re-investment and not topermit him to apply or divert the net consideration for any otherpurpose. According to him, the period provided under Section54E is the upper limit and the spirit of the Act contemplatesimmediate deposit after consideration is received by theassessee. We are of the view that a strict compliance withSection 54E read with Explanation 5 to the sub-section requires the assessee to deposit the net consideration received within thetime stipulated therein, for the purpose of claiming exemption.Any diversion or application of the sale consideration, if proved,will disentitle the assessee from the benefit of exemption underSection 54E. However, there is no requirement that the samecash or same amount should be deposited for the purpose ofexemption. There may not be any requirement to prove that thesame cash received is deposited as such in specified asset.However, we have, no doubt, in our mind that the advanceincome generated on investment in specified assets underSection 54E cannot be treated as net consideration for re-investment in same or another specified asset for claimingexemption on such amount also. This is because once part ofnet consideration is spent by the assessee, the same is notavailable for re-investment. Consequently, if the assessee'sargument is accepted, then shortage of net considerationinvested in specified assets immediately after transfer can bemade up from accruals in the form of interest on such I.T.APPEAL 132/01 8 investment upto six months, to make up for balance netconsideration for claiming exemption on the total investmentwhich is not contemplated under Section 54E of the Act. We,therefore, answer the question referred to in the appeal in theaffirmative i.e. Against the appellant/assessee and in favour ofthe Department and dismiss the appeal. We make it clear thatthis decision should not be interpreted to cover situations wherethe net consideration was not received by the assessee andshould be limited to the facts of this case. C.N. RAMACHANDRAN NAIR, JUDGE K. M. JOSEPH, JUDGE kbk. C.N. RAMACHANDRAN NAIR &K. M. JOSEPH, JJ. I.T.APPEAL NO.132 OF 2001 JUDGMENT 18[th] July, 2006.